Video: Understand your retirement fund rules

While retirement vehicles share some characteristics, especially on taxation, there are some key differences and it is important to understand exactly how your retirement fund works.

The similarities are:

  • All types of retirement vehicles give you a tax break on your contributions up to 27.5% of your income, capped at a maximum tax deduction of R350 000.
  • Growth in a retirement fund is not taxable, in other words you pay no tax on interest, dividends or capital growth.
  • Your retirement benefits are taxable when you withdraw. The rate of taxation depends on whether you are withdrawing before or on retirement. Income in retirement is also taxed.
  • Your retirement fund is one of the only investments protected from your creditors, except in the case of a divorce claim or a maintenance claim.

So now onto the differences. Employers offer a provident or a pension fund and currently these are treated differently on retirement.

A pension fund, including the Government Employees Pension Fund, must be annuitised on retirement. This means you are able to take up to one-third of your retirement benefit as a lump sum and depending on the amount, tax may apply. The remaining two-thirds must be used to purchase an annuity to provide you with an income in retirement which will be taxed.

A provident fund currently allows you to take your full lump sum at retirement after tax. This however will be changing in an incremental manner when new pension laws come into effect later this year and we will discuss these in a later show.

Finally we have a retirement annuity. This is a retirement fund that you can take out yourself. Be aware that you cannot access the funds in a retirement annuity until the age of 55 and then, like a pension fund, you have to invest two-thirds into an annuity.

Understand the rules of your retirement funding so you can plan for the future.

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